Hong Kong and the Mainland: An Evolving Interdependency

With the mainland having adopted its reform and opening-up strategy some 40 years ago and 20 years having now passed since the return of Hong Kong’s sovereignty, many people believe the high status once accorded Hong Kong has dwindled. On the economic front, they cite the fact that Hong Kong’s share of China’s overall foreign trade has dropped from almost 50% in the mid-1990s to 13% in more recent years. Similarly, Hong Kong’s share of foreign direct investment (FDI) in China has also declined, falling from its 1987 high of about 70% to just 30% in 2005 (although, more recently, it did rebound to 75%). Moreover, Hong Kong’s share of the total number of visitors to China has also declined, falling from 70% in 1980 to 54% in 2016.

On the other hand, Hong Kong’s reliance on the mainland has increased notably. In terms of external trade, the mainland’s share of Hong Kong’s import-export trade rose from 13% in 1980 to 50% in 2017. The share of direct investment from the mainland (not including indirect investment channelled via other sources such as the Cayman Islands and Bermuda) as part of Hong Kong’s total FDI climbed from virtually zero in the 1980s to 26% as of the end of 2016. In addition, the percentage of Hong Kong’s total number of visitors from the mainland surged from pretty much nil 40 years ago to 76% in 2017.

The above figures clearly show that, over the past few decades, the significance of Hong Kong within a number of China’s economic sectors has changed considerably. The figures, however, do not indicate that the importance of Hong Kong to China’s overall economic development has in any way diminished. As the economic connections between the mainland and Hong Kong have continued to evolve and as the mainland’s own economy has grown considerably, the significance of Hong Kong in a number of traditional sectors may well have dwindled. At the same time, though, its significance in several new economic sectors has clearly been enhanced.

Taking the financial sector as an example, as the mainland’s economy and its financial markets have developed, the channels for sourcing overseas funding have broadened, graduating from bank loans and direct investments to direct financing via the capital market. Since 1992, when red-chips and state-owned enterprises (SOEs) were first listed on the Hong Kong Stock Exchange, mainland enterprises have raised a total of US$560 billion through public and private offerings on the Hong Kong stock market. Although this amount still falls short of the US$900 billion cumulative total of Hong Kong direct investments in the mainland during the same period, in certain years, the amount of funds raised through capital markets exceeded the amount of direct investment. In terms of the combined total of direct investment and capital market financing, Hong Kong’s share of China’s offshore financing was nearly always above the 50% mark as far back as the 1990s and right up to the present day. In recent years, this share occasionally came close to 80%. Rather than dropping, then, the level of financing the mainland derives from Hong Kong has actually been increasing.

Similarly, trade relations between Hong Kong and the mainland have also gone through something of an evolutionary process. Simply by reviewing the relevant customs statistics it is clear that the share of Hong Kong-mainland trade as a percentage of the country’s overall foreign trade has declined considerably, falling from its 1992 high of 49% to just 13% in recent years.

It should be noted, however, that as a result of industrial relocation, the manufacturing and export shipment of many “Hong Kong products” are now conducted via the mainland. As a consequence, the applicable trade statistics have been attributed to the mainland’s overall foreign trade figures. Should the Hong Kong-related “offshore trade” figures currently allocated to the mainland be restored to Hong Kong’s own external trade figures, a very different picture would emerge. Such an exercise would clearly demonstrate that Hong Kong’s peak contribution to China’s overall level of external trade was not the 49% recorded for 1992, but rather the 67% that went unacknowledged in 2000. More recently, its recorded share, as revealed by the “offshore trade-adjusted” figures, would be 27%, more than double the official figure of 13%.

The two examples above clearly show that in order to fully understand the evolving nature of Hong Kong-mainland economic relations, an “organic”, holistic perspective must be adopted as opposed to a simple, mechanical perusal of the data on offer. Obviously, as the economies of the mainland and Hong Kong continue to develop, the interdependent relationship between the two will remain in a state of flux.

While the significance of Hong Kong in certain areas is clearly declining, its reliance on the mainland is increasing. This is particularly true in a number of the more traditional economic sectors, notably external trade and tourism. Due to changes in the relevant economic patterns, as well as shortcomings in certain statistical approaches, a number of misconceptions have arisen, particularly with regard to offshore trade and direct financing. There are also certain sectors where Hong Kong’s contribution and significance to China as a whole has grown considerably. This is most apparent with regard to several specific areas of economic development, including outward investment, RMB internationalisation and technology transfer.

As far as outward investment is concerned, Hong Kong has always been the mainland’s leading investment destination, accounting for more than 60% of its total outward direct investment. It should also be noted that the available forms of outward investment have also broadened. Whereas once the simple direct agency model prevailed, there are now a variety of options on offer, including group holdings, mergers, acquisitions and special-purpose vehicles.

In a similar fashion, the RMB internationalisation options have also increased. This has seen the sector expand from simple retail bank business to capital market activities and a range of specialised financial sectors, including insurance, wealth management and foreign exchanges. Across many of these sectors, though, Hong Kong remains the dominant player in the market, accounting for a substantial proportion of all RMB offshore deposit, loan, trade settlement, and foreign exchange settlement activity.

With many of the above instances relating to emerging economic development sectors, their true significance and likely growth may be difficult to glean from the official statistics. Additionally, as many of these sectors are highly specialised, they are not easily comprehensible to casual onlookers. Indeed, it is only through careful observation and in-depth study that the true nature of the economic interdependence and mutual support that exists between Hong Kong and the mainland can be properly ascertained.

At present, the mainland economy is entering a new phase of its development. This has seen it committing to a broad range of initiatives, such as market reform, industrial upgrade, wider opening up to the outside world, greater integration with the international economy and extensive proactive participation in the global economic recovery. Amid all this, Hong Kong, as the mainland’s most market-oriented, internationalised and open city, has a unique role to play in the country’s overall reform, as well as an immense contribution to make to its process of opening-up to the outside world.

This article originally appeared in Hong Kong Economic Journal (10 May 2018)

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